D.C. Pulls the Plug on Certain High Tech Tax Breaks
When Mayor Muriel Bowser first introduced her Fiscal Year 2020 Budget and Financial Plan on March 20, 2019, the $15.5 billion budget did not include any major corporate tax provisions. That changed on May 14, when the D.C. Council’s Committee of the Whole passed an amendment to the Fiscal Year 2020 Budget Support Act of 2019 (B23-0209) aimed at reducing tax breaks for Qualified High Technology Companies (QHTCs) in order to increase and reallocate revenue to housing, environmental, and other social programs.
Under existing law, D.C. taxpayers that meet the statutory requirements for QHTC certification enjoy a host of corporate franchise, sales and use, and property tax benefits. The amendment, named the Downloading Lost Revenues Amendment Act of 2019, makes the following changes beginning 2020:
Tax Credits
- Reduces the tax credit for wages to qualified employees to 5 percent of wages paid in the first 24 months after hiring (the current credit is equal to 10 percent of wages paid in that period);
- Reduces the maximum allowable credit to $3,000 for each qualified employee (the current maximum credit is $5,000 per qualified employee); and
- Eliminates the ability to carry forward unused credits for employees hired on or after October 1, 2019.
Corporate Franchise Tax
- Limits application of the reduced 6 percent corporate franchise tax rate to 5 years (under existing law, the reduced rate applies for as long as the entity continues to certify as a QHTC); and
- Caps the total amount of franchise tax reduction that a QHTC may receive as a result of the reduced rate to $250,000 per taxable year (under existing law, there is no limit on the amount of tax reduction that can result from the reduced rate).
- The bill does not address the exemption from corporate franchise tax for the first five years in which a QHTC has taxable income, or any other provision affecting QHTCs not discussed here.
Sales Tax
- Repeals the exemption for most sales by QHTCs in the District; and
- Repeals the exemption for sales to QHTCs of certain computer and technology equipment.
- These provisions will affect non-QHTCs as well.
The Council is scheduled to vote on the budget bill, as amended, on June 18, 2019, and it is expected to pass without major changes. Once it passes and is signed by the Mayor, it will enter a 30 day Congressional review period before becoming law. QHTCs and companies doing business with QHTCs in the District should begin considering the impact of these changes going forward.
Jeremy Abrams is the outgoing chair and DeAndre Morrow is the incoming Chair of the DC Bar SALT committee. They will be closely monitoring how the Office of Tax and Revenue implements these changes to the QHTC provisions.
Virginia Requires Tax Department to Study Impact of IRC 163(j)
Virginia conforms to the Internal Revenue Code as of December 31, 2018, including the interest expense limitations in IRC Section 163(j).1 On May 2, 2019, Governor Northam signed budget bill HB1700. Among other things, the bill required the Tax Commissioner to convene a working group by June 1, 2019 to study the impact of the limitation of interest expense on businesses that are part of an affiliated group and that file a Virginia combined or consolidated return (i.e., whether to test the limitation at the federal or state filing group level). The bill also requires the Commissioner to issue guidelines by December 1, 2019, and states that these guidelines will apply retroactively to taxable years beginning on or after January 1, 2018. This means taxpayers will need to file their 2018 Virginia Corporation Income Tax returns without the benefit of guidance on how the interest limitation will be computed at the state level.
The Department held an initial meeting with a newly formed working group on May 20, 2019. Several questions and concerns were raised at this meeting, which the Department is considering. Taxpayers, practitioners, and other interested parties may continue to submit comments or feedback during the initial comment period until July 1, 2019. The Department will then circulate draft guidelines for additional feedback this summer.
Jeremy Abrams is participating in the working group and will be monitoring any developments concerning the pending guidelines. If you are interested in submitting feedback on an anonymous basis, or if you would like a copy of the Department’s working group presentation, please contact Jeremy Abrams or the Reed Smith state tax attorney with whom you regularly work.
Maryland Comptroller’s Private Letter Ruling System Becoming a Reality
For decades, Maryland has gone without a private letter ruling system. The General Assembly’s 2019 operating budget bill will finally change that. After two years of being denied the necessary funding, the Comptroller of Maryland has been provided with the means to implement a long awaited, and mandated, private letter ruling system.
As background, a 2016 law required the Comptroller to adopt procedures and protocols related to the implementation of a private letter ruling process intended to provide guidance to taxpayers.2 The law also required the Comptroller to request additional resources if he determined that responsibilities such as the implementation of a private letter ruling process would have more than an incidental impact to the Comptroller’s annual budget.3
Each legislative session since the enactment of the law, the Comptroller requested the funding needed to implement the private letter ruling system, but to no avail. Because of this, implementation stalled. However, the passage of Maryland House Bill 100 by the 2019 General Assembly, which was enacted into Chapter 565 of the Acts of 2019 on May 13, 2019, provided the Comptroller with the necessary funding.
We expect this to be a large overhaul of the Comptroller’s current non-binding opinion letter system, and for there to be significant time before any formal implementation. Reed Smith attorney DeAndre Morrow – a former Comptroller tax attorney – is monitoring the status of this program, including developments related to the costs, procedures, and timing for requesting a private letter ruling.
Remote Sellers and Marketplace Facilitators Required to Collect Tax for all Three DMV Jurisdictions
All three jurisdictions in the DMV have responded to Wayfair by adopting economic nexus thresholds for remote sellers, with each adopting the same threshold: $100,000 revenue or 200 separate transactions. In addition, marketplace facilitators are required to collect tax on behalf of marketplace sellers beginning on the following dates:
- DC – April 1, 2019
- Virginia – July 1, 2019
- Maryland – October 1, 2019
Reed Smith Takeaway
The highlighted provisions are just some of the tax legislation enacted in the DMV this year. Taxpayers need to understand the details of each provision in order to comply with the laws going forward. For example, QHTCs that have never previously been required to collect DC sales tax may now need to prepare to do so for the first time. Virginia taxpayers will need to determine how to apply the interest expense limitation on their 2018 corporation income tax returns. Maryland taxpayers facing an uncertain tax issue will soon have the option of requesting a private letter ruling from the Comptroller. Remote sellers and marketplace facilitators will need to navigate the requirements for collection in each jurisdiction.
Reed Smith is closely monitoring these legislative developments as well as administrative responses. If you have any questions about how the highlighted pieces of legislation or other corporate tax provisions may impact your company, please contact one of the authors or the Reed Smith State Tax attorney with whom you typically work.
- Virginia will allow a state subtraction equal to 20% of the amount disallowed under Section 163(j).
- 2016 Maryland Laws Ch. 582 (S.B. 843)
- Id.
Client Alert 2019-156
